17 March 2006 GST/HST Ruling 60371 - Application of GST/HST to Memberships Supplied on the Internet

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your fax XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a variety of situations involving trade-ins against the purchase or lease of a vehicle.

All legislative references are to the Excise Tax Act (ETA) and the regulations therein, unless otherwise specified.

Interpretation Requested

You have provided eight (8) scenarios relating to the application of the GST/HST to transactions where the trade-in rules apply. You want us to confirm your understanding of how the rules would apply and provide you our views on the application of the tax where we do not agree with your conclusions. For each scenario, you have also provided an Exhibit illustrating the application of the GST/HST to the transaction.

With respect to the scenarios relating to a sales transaction, we understand that a customer (the "Customer") is purchasing a motor vehicle from a dealer (the "Dealer") where the balance of the purchase price, after any cash down payment and/or trade-in, is to be financed. Further, immediately after the sale, the balance being financed together with title to the vehicle (as security for the loan) is transferred to a finance company (the "Financeco.").

With respect to the scenarios relating to a lease transaction, we understand that a Customer is leasing a motor vehicle from a Dealer. Immediately after the lease is entered into, the lease and title to the vehicle are assigned to a Financeco.

Interpretation Given

Pursuant to section 165 of the ETA, every recipient of a taxable supply (other than a zero-rated supply), made in Canada, is required to pay GST calculated at the rate of 7% or HST at the rate of 15% for a supply made in a participating province (i.e., Nova Scotia, New Brunswick, and Newfoundland and Labrador) on the value of the consideration for the supply.

Under subsection 153(4) of the ETA, where, at the time a supplier makes a supply of tangible personal property to a recipient, the supplier accepts, in full or partial consideration for the supply, other property (referred to as the "trade-in") that

(a) is used tangible personal property or a leasehold interest therein, and

(b) is acquired for consumption, use or supply in the course of a commercial activity of the supplier,

and the recipient is not required to collect tax in respect of the supply of the trade-in, the value of the consideration for the supply made by the supplier is deemed to be equal to the amount, if any, by which the value of the consideration for that supply exceeds

(c) except where paragraph (d) applies, the amount credited to the recipient in respect of the trade-in, and

(d) where the supplier and the recipient are not dealing with each other at arm's length at the time the supply is made and the amount credited to the recipient in respect of the trade-in exceeds the fair market value of the trade-in at the time ownership thereof is transferred to the supplier, that fair market value.

Information on the "trade-in approach" is found in GST/HST Technical Information Bulletin B-084 (TIB B-084), Treatment of Used Goods.

Our response to each scenario, based on the information provided is as follows. Please note that we cannot comment on the XXXXX provincial sales tax as it is not within our jurisdiction.

Scenario 1  Customer owns a vehicle he/she intends to trade-in as partial payment for the vehicle he/she is purchasing. The Customer still has a loan outstanding against the vehicle being traded in which is secured by a lien on that vehicle. The loan balance is less than the value of the vehicle being traded in. The Dealer agrees to accept the trade-in and pays off the outstanding loan on behalf of the Customer.

It is your view pursuant to TIB B-084 that the value of the trade-in is not affected by any outstanding loan or lien. The full value of the trade-in is applied to reduce the consideration for the new vehicle subject to tax. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 2  Customer owns a vehicle he/she intends to trade-in as partial payment for the vehicle he/she is purchasing. The Customer still has a loan outstanding against the vehicle being traded in which is secured by a lien on that vehicle. The loan balance is greater than the value of the vehicle being traded in. The Dealer agrees to accept the trade-in and pays off the outstanding loan on behalf of the Customer.

It is your view pursuant to TIB B-084 that the value of the trade-in is not affected by any outstanding loan or lien even though the amount of the outstanding loan is greater than the current value of the trade-in. The full value of the trade-in is applied to reduce the consideration for the new vehicle subject to tax. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 3  Customer has an existing lease of a vehicle and wishes to purchase a new vehicle. The amount required to buy out the existing lease is less than the current market value of the Customer's vehicle (such that the Customer is said to have "positive equity" in the lease). Customer assigns his/her lease to the Dealer who would then buy out the lease, sell the vehicle and apply the difference to the Customer's purchase of the new vehicle.

It is your view that subsection 153(4) of the ETA applies where there is a trade-in of used tangible personal property or a leasehold interest therein. In this scenario the Dealer agrees to credit the Customer with the value of that interest (i.e., the current market value less the buyout price on the Customer's leased vehicle). The consideration for the new vehicle subject to tax is therefore reduced by the amount of the leasehold interest. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 4  Transaction is identical to Scenario 3 except that in this case the lease buyout amount is greater than the current market value of the leased vehicle (such that the Customer is said to have "negative equity" in the lease). Where the Customer assigns the lease to the Dealer and the Dealer sells the vehicle, the Dealer will add the difference to the amount to be financed.

You have identified that the issue in this scenario is whether GST/HST should apply to the additional amount payable by the Customer relating to the negative equity in the lease. It is your view that the scenario is analogous to the situation of a trade-in with a lien in that the buyout of the existing lease and subsequent sale, at a loss, should be considered a separate financing transaction. The alternative would be for the Customer to borrow the amount necessary to buy out the lease less the amount received on selling the leased vehicle. GST/HST should not apply to the additional amount payable by the Customer.

After reviewing the Exhibit, your application of the GST/HST in this scenario is not correct based on our interpretation of subsection 153(4) and our position in TIB B-084.

It is our general view that the payment made by the Customer in respect of the negative equity in the lease is similar to making a payment is respect of a "lease deficiency" amount. We consider a lease deficiency payment to be an amount paid to a Lessor that is part of the consideration for the lease of the vehicle, which is a taxable supply. TIB B-084 states: "Where a lessee is obligated under the terms of a lease agreement to pay the lessor for any shortfalls below the guaranteed amount in the vehicle's value at the termination of the lease period, any shortfall in that amount is considered for GST/HST purposes to be additional consideration paid in respect of the vehicle." Using your analogy, when the Customer borrows the amount necessary to buy out the lease, the individual will pay GST/HST on the amount paid to buy out his/her existing lease pursuant to the agreement. Where the Customer supplies the leasehold interest in the existing lease to the Dealer and the Dealer then includes the difference between the buyout amount and what it gets for the subsequent supply of the vehicle into the amount financed, it is the same as if the Customer was paying the original Lessor for a lease deficiency, the Customer is now just paying the amount to the Dealer.

Further information, such as the sale documentation and the Customer's existing lease would be required to properly determine the correct application of the tax (i.e., when tax is payable) to this transaction.

Section 168 of the ETA outlines when the recipient of a taxable supply is required to pay the GST/HST on that supply. Subsection 168(2) of the ETA applies with respect to the lease of a vehicle that involves multiple payments, including payments made periodically over the course of the lease, and in some instances, a lease deficiency due at the end of the lease. As stated previously, a lease deficiency is part of the consideration for the supply of a vehicle by way of lease. Therefore, GST/HST must be calculated on that part of the consideration on the earlier of the day the lease deficiency is paid or the day it is due pursuant to section 152 of the ETA. Generally, a lease deficiency is due on the date that the individual is required to pay the lease deficiency under the lease agreement.

Scenario 5  Customer owns a vehicle he/she intends to trade-in as partial payment for the vehicle he/she is leasing and the trade-in has an existing lien that is less than the value of the trade-in. The Dealer agrees to accept the trade-in and pays off the outstanding loan balance on behalf of the Customer.

It is your view pursuant to TIB B-084 that the value of the trade-in is not affected by any outstanding loan or lien. The full value of the trade-in is applied to reduce the consideration for the new vehicle subject to tax. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 6  Transaction is identical to Scenario 5 except that in this case the loan outstanding on the Customer's trade-in is greater than the current value of the trade-in.

It is your view pursuant to TIB B-084 that the value of the trade-in is not affected by any outstanding loan or lien even though the amount of the outstanding loan is greater than the current value of the trade-in. The full value of the trade-in is applied to reduce the consideration for the new vehicle subject to tax. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 7  Customer has an existing lease of a vehicle and wishes to lease a new vehicle. Customer has "positive equity" in his/her existing lease. Customer assigns the existing lease to the Dealer who then buys out the lease, sells the vehicle and applies the difference to the Customer's new lease.

It is your view that subsection 153(4) of the ETA applies where there is a trade-in of used tangible personal property or a leasehold interest therein. In this scenario the Dealer agrees to credit the Customer with the value of that interest (i.e., the current market value less the buyout price on the Customer's leased vehicle). The consideration for the new vehicle subject to tax is therefore reduced by the amount of the leasehold interest. After reviewing the Exhibit, your application of the GST/HST in this scenario is accurate based on our interpretation of subsection 153(4) and our position in TIB B-084.

Scenario 8  Transaction identical to Scenario 7 except that the Customer has "negative equity" in the lease. Where the Customer assigns the lease to the Dealer and the Dealer sells the vehicle, the Dealer will add the difference to the amount to be repaid under the lease.

You have identified that the issue in this scenario is whether GST/HST should apply to the additional amount payable by the Customer relating to the negative equity in the lease. It is your view that the scenario is analogous to the situation of a trade-in with a lien in that the buy out of the existing lease and subsequent sale, at a loss, should be considered a separate financing transaction. The alternative would be for the Customer to borrow the amount necessary to buy out the lease less the amount received on selling the leased vehicle. GST/HST should not apply to the portion of the monthly lease payment that relates to this additional amount payable by the Customer.

After reviewing the Exhibit, your application of the GST/HST in this scenario is not correct based on our interpretation of subsection 153(4) and our position in TIB B-084.

It is our general view that the payment made by the Customer in respect of the negative equity in the lease is similar to making a payment is respect of a "lease deficiency" amount. As noted in Scenario 4, we consider a lease deficiency payment to be an amount paid to a Lessor that is part of the consideration for the lease of the vehicle, which is a taxable supply. Using your analogy, when the Customer borrows the amount necessary to buy out the lease, the individual will pay GST/HST on the amount paid to buy out his/her existing lease pursuant to the agreement. Where the Customer supplies the leasehold interest in the existing lease to the Dealer and the Dealer then includes the difference between the buyout amount and what it gets for the subsequent supply of the vehicle as part of the lease agreement, it is the same as if the Customer was paying the original Lessor for a lease deficiency, the Customer is now just paying the amount to the Dealer. Depending on the lease agreement, the amount may become a part of the monthly lease payment or could be an amount due at signing.

Further information, such as the lease agreement for the new vehicle and the Customer's existing lease would be required to properly determine the correct application of the tax to this transaction for the reasons mentioned in our views on Scenario 4.

The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Goods and Services Tax Rulings, do not bind the Canada Revenue Agency with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.

If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (613) 952-8814.

Yours truly,

Robert Douthwright, CGA
Goods Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2006/04/05 — RITS 60463 — GST/HST Info Sheet on ABM Services: Interchange